Discounting, Factoring, and Selling Invoices for Cash

Everyone likes cash, right? We like seeing healthy account balances, and we feel a bit more confident when there’s money in our pocket. We also use it to our advantage—when we owe money, we want to keep our cash and sometimes use a card or account to delay payment. On the other hand, when we are owed money, we prefer that we are paid right away. So what happens if you’re not paid yet, but you need money sooner?

In a dynamic business, access to liquid capital can be inconsistent based on varying cash flows. If you sell a large piece of equipment, for example, you might have to wait for payment or structure payment terms with the buyer. Even a small invoice will likely be paid at least 30 days after the invoice date.

While you are waiting for your revenue, there are bills to pay and investments to make. When a receivable is outstanding, it can limit an organization’s ability to pay others or to make capital investments. If you know you have money on the way, there are a few methods to get earlier access to your own cash.

1. Discount Your Invoices. Normally, after a product or service is provided, we wait for a customer to pay us. This commonly takes 30-45 days and holds your receivables hostage during that time. Discounting is a low-cost way of getting paid earlier. In this scenario, you offer a discount to your customers on your invoice for quicker payment. For example, you might offer a 2% discount if it is paid within 10 days. They save money, and you get cash-in-hand more quickly.
2. Borrow Against the Invoices. When you have completed sales and are awaiting payment for them, it is possible to borrow against those receivables. This option does not rely heavily on timely payment from customers because you borrow against your AR from a lender. Most business banks will offer this if you show consistency in sales and customer payments. The rate will be higher than discounting, but it will provide some consistency and ensure that large receipts don’t disrupt your cash flow on an ongoing basis.
3. Factor Your Invoices. The factor in this scenario is a financier or bank. The bank buys your invoices and is then responsible for collecting full payment. You, on the other hand, receive approximately 80% of the amount due. In addition, your customers will know that you sold the invoice, and that could reflect poorly on your company’s stability and reputation. This is the most expensive alternative, but it can be negotiated with asset-based lenders who specialize in this type of financial product.

Obviously, receiving payment on your invoices within normal net payment periods is the least expensive way to receive cash for your products and services. Turning an asset into cash always has a cost and, all things being equal, you would wait for your money to arrive. But if your cash needs demand some creative finance options, then discounting, borrowing and factoring your invoices could fulfill a temporary shortfall. 

Author Profile Jon Forknell is the Vice President and General Manager of Atlas Business Solutions, Inc., a software marketing company specializing in employee scheduling software, including ScheduleBase employee scheduling software, and other business software solutions. In the past, Jon has been recognized by the U.S. Small Business Administration as a SBA Young Entrepreneur of the Year. Atlas Business Solutions was named as one of Software Magazine’s Top 500 Software Companies in 2004 through 2007, and 2010, 2013, 2014, 2016, 2017, and 2018.